Conservative investors are sometimes drawn to bond markets due to their relatively low risk, predictable income stream and principal protection. What investors gain in relative security, however, is sometimes lost in low returns. Factor in inflation and any potential gains could be negligible.
A recent whitepaper by Barclays examined the performance of bonds over the course of the last two decades and compared it to using two indices in fixed indexed annuities over the same period. What did they find? Read on to learn more.
Bond, S&P 500 and Barclays Risk Balanced Index Performance Over the Last 20 Years
Even though bond markets have often been regarded as a “safer bet,” the convergence of several economic factors have left some bond investors feeling uncertain. Oddly enough, the uncertainty only breeds more volatility. And so the cycle continues.
Barclays examined cumulative returns for Single A bonds over the course of a little more than 20 years (December 2001 – May 2022) and showed a total return of 4.36%. Comparatively, the S&P 500 experienced total returns of 8.59% over the same period, about double that of bonds.1 Barclays also examined returns of a dynamic portfolio of equities and bonds, represented by the Barclays Risk Balanced Index. Over the same period, the Barclays Risk Balanced Index experiences the highest total returns of 9.52%.1
Interestingly, the Sharpe ratios for bonds and S&P returns were nearly identical, at .50 and .49 respectively. As any financial professional knows, a Sharpe ratio should exceed .50 to achieve market-beating performance over the long run. Achieving a Sharpe ratio around 1 over a long period generally demonstrates better returns relative to the risk that was taken on. What might be most appealing to risk-averse investors, however, is the risk relative to the returns for Barclays Index. It was nearly twice that of bonds and the S&P, coming in at a .98 Sharpe ratio, and also had significantly smaller drawdowns over two decades.1
Comparing Performance of Structured Annuities
Much like bonds, fixed indexed annuities (FIAs) and registered index linked annuities (RILAs) with a 0% floor can provide limits on loss. In contrast to bonds exposed to yields which are at historic lows, however, structured annuities can participate in a wider range of investment exposures. This can allow for greater diversification.
To compare the use of these indices in structured annuities to bonds, Barclays simulated 0% floors, solving for the cap for the S&P 500 Index and Barclays Risk Balanced Index. How do the Indices featured in structured annuities compare to bonds over time?
In a simulated 20-year historical performance comparison to the aforementioned Single A bonds, the Barclays Risk Balanced Index outperformed bonds 84% of the time, and the S&P 500 Index outperformed bonds 61% of the time. Average annualized returns for the Barclays Risk Balanced Index would have been 7.65%, more than 50% higher than that of bonds at 4.87%. The Barclays index would have also outperformed the S&P 500 Index over the same period by a little more than two percentage points.
While the performance comparison laid out by Barclays specifically calls out fixed index annuities, it’s important to note that the findings also apply to Registered Index Linked Annuities (RILAs) with a 0% floor.
The potential for greater returns without having to take on the risks associated with traditional market portfolios may be appealing to investors who can’t stomach the unprecedented volatility in recent years. Financial advisors are encouraged to download Barclays whitepaper below featuring all the data and details behind the methodology. Then, speak with your CUNA Mutual Group wholesaler to begin offering the innovative and proprietary Barclays Risk Balanced Index in an annuity product.